One of the key attractions to an SMSF is the ability to move certain assets from outside the superannuation environment into the Fund.
Section 66 of the SIS Act, prohibits the intentional acquisition of assets (other than money) from a related party, however there are some specific exclusions including:
- listed securities acquired at market value (only available to 30 June 2013)
- business real property
- widely held trusts; and
- in-house assets (up to 5% of market value of fund assets)
The ATO have recently finalised their SMSF Ruling, SMSFR 2010/1 which looks at the application of subsection 66(1).
Transferring assets into super has long been common practice, whether they have been as a contribution (e.g. concessional or non-concessional contribution) or whether acquired from the member as an exchange of cash (for market value consideration).
I’ve outlined below a few important things to note or consider with each of the exceptions:
- Listed securities is defined to include shares, options, warrants, bonds, debentures, rights, managed investment schemes or any other security listed for quotation.
- An approved exchange not only includes the ASX, but also smaller domestic exchanges such as the Newcastle Stock Exchange (NSX) or Bendigo Stock Exchange (BSX). It also includes international stock exchanges such as the NASDAQ in the US and the FTSE in the UK.
Business Real Property (BRP)
- BRP must be used ‘wholly and exclusively’ in one or more businesses. It does not have to be your own business, it must simply be operating under a commercial lease arrangement.
- Special rules apply to farmland, where up to 2 hectares can be used for your own residence without prejudicing the definition of BRP
- The ATO have finalised a SMSF Ruling, SMSFR 2009/1 which provides some excellent examples of what is and isn’t considered as BRP
Widely Held Trusts
- the definition of widely held unit trust is defined as 20 or more unrelated unit holders.
- Assets that can be transferred into super are subject to the 5% threshold. IHA assets that can be acquired include:
- shares in private companies
- units in related unit trusts (except where trust held BRP – not treated as IHA)
I note that the acquisition of an asset from a member must be completed without any charge being held over the asset, therefore if the current asset is encumbered, that debt and/or charge must first be removed (or completed contemporaneously). The only exception to this would be where the fund acquired any of the above using an SMSF instalment warrant.
The transfer of assets into an SMSF is a CGT event and will create a capital gains tax gain/loss for the individual or entity. There are a range of strategies that can be used to reduce or eliminate CGT, including:
- Deductible superannuation contributions (concessional) to reduce CGT, where member has met 10% rule;
- subject to timing of contribution and future contribution limits, can use contributions reserve strategy to ‘double dip’ on the tax deduction in the year of transfer. Need to consider timing of transfer. Refer to blog, “Help!! I’ve got excess contributions” for details on use of a contributions reserve.
- Use of small business concessions for transfer of BRP where asset is/has been used within your business.
- Need to consider effective transfer of property (refer to blog, “7 steps to successfully transfer BRP into a SMSF”)
As a result of the Stronger Super reforms, the listed shares exception is to cease from 30 June 2012. It was recommended and has been accepted that where an underlying market exists to buy and sell assets, then they must occur on this underlying market.
The only exception that I believe is lacking is the ability to transfer residential property into an SMSF. I understand that the exception would need to be quite tight in terms of people not transferring holiday homes etc, however it appears to be quite biased towards commercial property (and I’m not sure why?).
I would be asked this question about transferring residential property into an SMSF almost weekly. Only last week I was contacted about whether a person who was acquiring a residential property via an estate (father passed away) could transfer the asset into a SMSF. I was then the bearer of bad news, but I can’t see why an exception can’t exist for circumstances like this?